London Stock Exchange to shake up trading with midday stock auctions

The London Stock Exchange is hoping to win business back from dark pools with noon auctions from next year.

The shape of the London trading day is to change next year, after the London Stock Exchange (LSE) announced that it plans to introduce specific midday auctions for some of its most significant stocks.

Continuous trading will be paused for two minutes every day at noon to allow for a new intraday auction of SETS equities – the biggest and most liquid shares being traded on LSE’s markets. What’s more, the auctions will be conducted anonymously, allowing firms to trade large amounts of shares without the new becoming public knowledge.

Two auctions a day already take place with a separate event at the start and end of each trading sessions. But by opening up another opportunity to big firms to buy and sell large stocks, it’s clear that LSE is attempting to win back some of the business it has lost to so-called “dark pools” over the past few years.

Dark pools have grown in popularity as an alternative to traditional exchanges. They offer companies the chance to trade large chunks of stock in an environment where because all transactions are anonymous, prices don’t rise or drop in response to other purchases.

However, reforms recently drafted by the EU will place a limit on the amount of shares that can be traded anonymously. Now, just eight per cent of a business’ shares can be bought and sold without public knowledge, which means that the traditional exchanges stand to gain from firms looking to make big orders.

“The introduction of the intraday auction is in direct response to demand from buy-side participants for neutral, infrastructure-led solutions for trading in large blocks,” said LSE head of equities Brian Schwieger. “The auction will allow participants to place orders in a truly confidential, yet price-forming environment via a well understood mechanism.”

He added that the midday timing of the new auction will line up with the parallel intraday auction in Germany. If other European exchanges follow their lead, Mr Schwieger says, it could lead to the emergence of a “pan-European focus for liquidity”. If it opens the doors to further stocks trading across the continent, the move could even represent a major change for the finance sector as a whole.